Italian Guarantee Scheme

Citing exceptional market volatility and restricted access to credit following the collapse of Lehman Brothers on September 15, 2008, governments around the world sought to implement stabilization measures to support their domestic economies. Even Italy, with low exposure to the US subprime mortgage crisis, reacted rapidly to protect solvent banks that had the potential to be severely impacted by soaring interbank lending costs.

The Italian Ministry of Economy and Finance (MEF), in cooperation with the Banca d’Italia, responded to the global financial crisis (GFC) by introducing a coordinated package of interventions intended to support banks’ medium- and long-term financing needs. On October 9, 2008, the MEF issued Decree-Law No. 155 on “Urgent measures to guarantee the stability of the credit system and the continued availability of credit to enterprises and consumers in the current crisis on international financial markets,” which granted the government extraordinary administrative powers and outlined measures for a bank recapitalization program, a new deposit guarantee program, and an emergency liquidity facility.^FNUnder Italian law, in extraordinary circumstances a Decree-Law can be adopted by a ministry and take legal effect, subject to ultimate confirmation by Parliament. Four days later, on October 13, 2008, the MEF adopted an addendum to Decree-Law No. 155 entitled Decree-Law No. 157 regarding “Additional urgent measures to guarantee the stability of the credit system.” This follow-up legislation provided the legal basis for the Italian Guarantee Scheme, a temporary bond swap program, and a separate guarantee program for banks looking to refinance within the Eurosystem.^FNAmong other measures announced in Decree-Laws No. 155 and 157, the Italian Ministry of Economy and Finance introduced a separate State guarantee program whereby non-bank institutions would lend guaranteed high-quality bonds to banks in exchange for distressed assets. The banks would then use these bonds as collateral to refinance within the Eurosystem (European Commission 2008). The purpose of the program was to encourage the transfer of high-quality bonds to the banking sector from other financial sectors of the economy (European Commission 2008). Under this program, temporary loans greater than €500,000 and with durations of less than three years were eligible for guarantees equal to the market value of the bonds. Participation fees reflected those assessed for banks benefiting from the Guarantee Scheme.

The interventions outlined in the Decree-Laws were submitted to the European Commission for authorization on November 11, 2008. Having found the scope of the measures to be in accordance with State aid rules, the European Commission granted its approval on November 13, 2008. Both Decree-Laws were made official with the passage of Law 190/2008 by Parliament on December 4, 2008.

Jointly administered by the Italian Ministry of Economy and Finance and the Banca d’Italia, the Guarantee Scheme was implemented with the passage of Law 190/2008 by Parliament on December 4, 2008. Italian authorities believed that the intervention, which would provide government guarantees on debt issued by Italian banks, would assist in improving the flow of liquidity between banks by supporting the short- and medium-term financing needs of institutions impacted by the international credit crunch. Participation in the Guarantee Scheme was voluntary and required the approval of the Banca d’Italia. In the event of default, the Italian government would assume coverage for 100% of principal and interest guaranteed.

The Italian Guarantee Scheme did not have a prescribed overall cap. Instead, all guarantees provided under the program were to be issued at “market conditions” and prioritized according to individual banks’ liquidity levels and capital ratios (Shearman & Sterling 2008). Such assessments were to be conducted by the Banca d’Italia.

Institutions eligible for the Guarantee Scheme included solvent banks incorporated in Italy, including Italian subsidiaries of foreign banks. Solvency was to be determined by the Banca d’Italia prior to the MEF’s approval of any guaranteed debt issuance. based on core capital and total capital ratios, as well as accounting losses over the last three consecutive years (European Commission 2008).

The Guarantee Scheme covered debt issued in euros with maturities of greater than three months and less than five years. Although there were few specific guidelines pertaining to the eligibility of debt, guaranteed instruments were required to have been issued at a fixed rate after October 13, 2008. They also had to “provide for the repayment of the principal in a single installment at maturity” (European Commission 2008). Explicitly excluded were subordinated debt, guaranteed bank bonds, structured instruments or complex products, products with a derivative component, and regulatory capital.

Caps on individual institutions’ participation in the credit guarantee, bond swaps, and refinance guarantee program were determined by the Banca d’Italia according to capital requirements (patrimonio di vigilanza): “each beneficiary bank cannot benefit from the various measures included in [Decree-Law No. 157] for an amount higher than their capital for supervisory purposes including its Tier 3 capital” (European Commission 2008). Additionally, no more than 25% of guaranteed liabilities could have maturities longer than three years. 

Participation fees were assessed according to the guidelines laid out in the European Central Bank’s “Recommendations on Government Guarantees on Bank Debt” of October 20, 2008. For short-term debt with maturities of between three months and 12 months, the fee equaled 50 basis points (bps) on an annual basis. For medium-term debt with maturities greater than 12 months, the fee equaled 50 bps on an annual basis, plus a variable fee calculated based on the issuing bank’s five-year credit default swap (CDS) rating or credit rating. For banks without any ratings, the fee equaled the median of the five-year CDS spreads recorded in the same period from major banks that have registered offices in Eurozone countries but were of the lowest available rating category, plus 50 bps on an annual basis.

Further, guaranteed issuances for debt with maturities of longer than two years incurred an additional top-off fee of 50 bps on an annual basis, beginning 24 months from the original granting of the guarantee.

Although there were no restrictions on either the issuance of non-guaranteed debt by participating banks or the minimum amount of each guaranteed issuance, the Ministry of Economy and Finance did impose limits on balance sheet growth for institutions partaking in the Guarantee Scheme. Italian authorities would thus monitor banks’ activities to ensure that the aggregate balance sheet volume did not exceed the higher of the annual growth rate of Italian nominal GDP in the preceding year, the average historical growth in balance sheets in the Italian banking sector between 1987 and 2007, or the average growth rate of the balance sheet volume in the European Union (EU) banking sector in the preceding six months (European Commission 2008).

The issuance window of the Guarantee Scheme was originally set to expire on December 31, 2009. On June 16, 2009, the European Commission approved a request by the Italian Ministry of Economy and Finance to extend the program by six months due to ongoing turbulence in global financial markets and to preempt any “deterioration of [Italian] banks’ risk profile (European Commission 2009).

As of May 2009, no bank had applied for coverage under the Guarantee Scheme. Italian authorities suspected that this lack of usage was due to the high participation fees charged, as well as the stronger credit profile of Italian banks and “different sovereign spread of Italy” as compared with other EU countries (European Commission 2009). Specifically, the fact that guidance from the European Central Bank called for a uniform fee structure across European countries with very different sovereign credit ratings meant that Italian institutions had to pay the same guarantee fees as similarly rated institutions in other countries despite the guarantee they received being worth less.    

The Guarantee Scheme issuance window expired on December 31, 2009, at which point no bank had applied for coverage (European Commission 2011).

On December 15, 2011, the European Commission approved a request from the Italian Ministry of Economy and Finance to reintroduce the Guarantee Scheme with slightly amended terms (see Appendix A: The 2011 Reintroduction of the Italian Guarantee Scheme).